Analyzing the craft beer (non)bubble

One of the most frequently asked questions surrounding the craft brewing industry these days is: “Are we in a bubble, and if so, when will it pop?”

I’ll cut straight to the chase and give the short answer: I see little to no evidence that craft is in a bubble. Now for the longer answer.

First, let’s define a bubble. A bubble is a period of over-investment where asset prices aren’t aligned with reality. In other words, people are betting on a future that won’t exist. Sadly, too many Americans now understand this all too clearly, having invested in a housing market that they assumed could only go up. What evidence is there that craft is in a similar situation; that brewers and investors are betting more than they should on a future that won’t exist?

Before answering this question, we can compare the current growth in the number of breweries to a real bubble, the Dotcom boom and bust of the late 1990s – early 2000s. The graph below charts the current rise in the number of brewing facilities (from Dec. 2007 – Aug. 2013) versus the NASDAQ close for the same number of months during the Dotcom boom and bust (Oct. 1998 – June 2004).

The comparison is striking. Suddenly, the current rise in the number of breweries looks slow and steady (for the record, the NASDAQ is now back up to over 3,700).

This leads me directly to my second point: Everyone should stop talking and/or worrying about the number of breweries. For one, the number of breweries includes brewpubs, and while there are only so many seats at existing brewpubs, the brewpub category has plenty of growth potential.

How many neighborhoods in America can support a new high-quality brewpub down the street? (Note the “quality” part: that’s a minimum to play these days). The answer is probably a lot, just the same as a new, high-quality restaurant, or a great new bar. In addition, there’s plenty of evidence that America can support a ton of new breweries. Germany has 1,300 breweries, with a heck of a lot less people. If the United States had the same number of breweries per capita (our population is over 3.8x bigger), that would mean 5,000 breweries. Whether the US can support 5,000 or 10,000 breweries, however, is pretty irrelevant without knowing how much beer they are each making, which brings me to my third point: